Covered Calls for Fun & Income

April 27, 2009

New Position – TXT

Textron sucked me in again! If you look at my closed trades, I lost money on this, but it was all completely my fault. I did something really stupid and wrote a Call below my cost basis last month. It ended up trapping me on a very good stock. So this time I am playing this the right way.

TXT appeared on the CallWriter $10-$20 list with very solid downside protection. Fundamentally and technically, this is a very good stock and passed 5 of my entry criteria, with the exception of the earnings date, which is in two days on 4/29. On 4/9 rumors spread regarding an acquisition and the stock has held up very well since. I am assuming a negative to neutral earnings will not have much of an effect on the price and the acquisition will take weeks or months to finalize.

With that in mind, I entered a slightly ITM Covered Call with a strike of $11 and with May expiration (see below).

– Jeff

“I think it is good that books still exist, but they do make me sleepy.” Frank Zappa (1940 – 1993)

Date

BTO Stock & Price

STO Option & Price

Option Exp/Strike

Cost Basis

ITM Return

Downside Protection

4/27

TXT 11.29

TXYEJ 1.41

MAY 11

9.89

11.22%

12.8%

4/24

AKAM 19.41

UMUED 0.96

MAY/20

18.46

8.34%

4.9%

3/23/09

UAUA 8.04

UALEA 0.40 #4

MAY/5

5.63

-7.79%

N/A

3/9/09

USO 27.65

26.10

5.6%

3/3/09

GERN 7.94

GQDEU 0.44 #3

MAY/7.5

6.94

7.1%

N/A

April 26, 2009

New Position – AKAM

With only three weeks to go before expiration (it’s early this month, May 15th), it was time to make some commitments and get serious about entering some trades. Earnings are presenting a challenge, but I really don’t want to sit on the sidelines, so I will have to take some calculated risks and be very selective on my choices. This means I may have to give up a few percent in returns, but that’s OK with me. So on Friday I entered a Buy-Write on AKAM (details in the Open Position table below).

Akamai Technologies is leading its industry, healthy financially, plenty of cash; really the only negative on this play is earnings on 4/29. Since all indications are bullish for this stock, I didn’t want it to run away from me. If earnings are good and the stock gaps up or moves up smartly, it may present an opportunity for an early exit for me. Otherwise I feel confident that it will finish ITM on 4/15.

This play appeared on the CallWriter NASDAQ 100 list. I still feel that the NASDAQ is outperforming most other indexes and there are several good choices on that list, but returns aren’t what they have been the list 2-3 months because volatility is decreasing. Don’t get me wrong, this is all OK with me. Even though the premiums are not what they were, the probability of a Covered Call on a good company finishing ITM is much higher under these conditions.

I still have not done anything with USO. I am hoping that it moves above 30 and I can sell the stock without writing any new Calls against it.

– Jeff

“The income tax has made more liars out of the American people than golf has.” Will Rogers (1879 – 1935)

Date

BTO Stock & Price

STO Option & Price

Option Exp/Strike

Cost Basis

ITM Return

Downside Protection

4/24

AKAM 19.41

UMUED 0.96

MAY/20

18.46

8.34%

4.9%

3/23/09

UAUA 8.04

UALEA 0.40 #4

MAY/5

5.63

-7.79%

N/A

3/9/09

USO 27.65

26.10

5.6%

3/3/09

GERN 7.94

GQDEU 0.44 #3

MAY/7.5

6.94

7.1%

N/A

April 23, 2009

Time to Start Shopping

I really hate earnings season for several reasons. First of all it plays havoc with prices and things get really crazy. Second, it prevents me from having open season on Covered Calls. I am averse to opening a new position with the company’s earnings announcement a few days or weeks away. That won’t stop me if many of the other criteria I use to enter a trade look good – but it sure makes me hesitate and think twice. Maybe that’s a good thing?

I spent part of yesterday prospecting for profitable positions. I can tell that volatility is beginning to drop (premiums are decreasing), and you can too by looking at the VIX (CBOE Market Volatility Index), which is currently at 38. Historically it has oscillated from 10 to 30 which generally speaking is an indication of a stable market and economy. Since September of last year, it has moved up and even peaked as high as 89 in October 2008. Of course this means huge premiums on options, but is also means huge risk on the underlying. Me? I prefer the VIX to hang out around 20-35 for the best balance of premium and risk, but you ultimately work with what you have rather than sit on the sidelines and wring your hands.

I have been surfing the Call Writer lists and found the greatest returns (and the greatest risk) on the stock in the Under $10 and $10-$20 lists. So here are some potential positions that I am considering right now – this is not investing advice 🙂

AKAM MAY 20 – relatively stable stock in a recent up-trend and wasn’t hurt too badly by the March bottom. Meets several entry criteria and earnings are 4/29. Nice return of 6.7% as of now.

GMXR May 10 – sort of a risky play but price is bouncing at support and Stochastic is heading up. Earnings are scheduled for 5/5 so I might put this on the shelf until then. Return 17.1%.

RVBD May 15 – I never heard of this company (you should check it out) and it is acting like a Dot Com type of play, so it’s purely speculative for me. This stock totally ignored the March bottom and is currently in a consolidation phase. Their earnings are scheduled for today, but I will not make any decision until tomorrow. This one should be very interesting to watch. Return 11%.

That’s the short list for now. I still have USO to think about, but I won’t make any decision now unless it makes a big move up.

I mentioned Apple Computer on the last post and it did report good earnings and is up nicely this morning – again.

I also mentioned that I was seriously thinking of moving my blog from Word Press Hosting to self hosted version. I have done some testing and it ‘seems’ simple enough. My concern is the URL change for the faithful. I think there are some workarounds for that and I will be checking them out.

Be patient and chose your plays wisely.

– Jeff

“Technology is dominated by two types of people: those who understand what they do not manage and those who manage what they do not understand” Putt’s Law

April 20, 2009

April Expiration Results

Normally I like to take the bad news first and then the good news – you know, so I feel better when it’s all over. But this month’s expiration contained some really good news and some not-so-bad news, so I will go with the good news first.

JAVA – As you probably know by now, today Oracle tendered an offer for Sun Microsystems for 9.50 a share. This is a wee bit better than the IBM offer @ 9.40 and it may not face any antitrust issues. But that’s not what’s important; it’s the effect it had on the price of my shares today. Friday my APR 7.50’s expired OTM with the stock at 6.69 and my cost basis at 6.58. Since today all I had were the shares, I sold them soon after the open for 9.09 and a sweet 30.93% gain on the whole deal. This didn’t involve much skill – just a lot of good luck!

X – US Steel expired ITM for a gain of 12.19% in 4 weeks (I did 2 Covered Calls on this one).

PRU – Prudential expired ITM for a 4.64% gain with a holding time of 2.3 weeks.

LNC – Lincoln National expired ITM for a 4.59% gain in 1.6 weeks.

The above are closed positions, so visit my Closed 2009 page for a recap of the year.

USO – US Oil finished OTM Friday. I won’t do anything with this except watch it this week. Of course, if it moves up above 30, I will probably sell it. If it remains flat, I may sell some MAY 29 or 30 Calls.

TXT – I let this one expire ITM for a 6.5% loss. I was in a trap with this since I rolled it on 3/16 for a strike below my cost basis. I should not have done that since the stock was showing strength with the Stochastic moving smartly up and my cost basis at 5.47, but I was greedy and thought only of the premium amount. In retrospect, holding the stock into April would have netted me an easy 100%+ gain. They say hindsight is 20/20, but it also teaches us lessons.

UAUA – UAL Corp could turn out to be a problem for me. I have been trapped before when I roll down to a strike below my cost basis, as in TXT. If I have to let this be called on May 15th, it will produce a loss of 7.79%.

GERN – For Geron Corp I was able to avoid the underwater trap by rolling this to a MAY 7.50. It cost me a debit of 0.40 to do this, but I will be able to sleep a lot better knowing I can avoid a loss at this point. This is a stock I should not have entered, since I really did not want to hold this for a long time, but here I am trying to make a small profit on it.

Date

BTO Stock & Price

STO Option & Price

Option Exp/Strike

Cost Basis

ITM Return

Downside Protection

3/23/09

UAUA 8.04

UALEA 0.40 #4

MAY/5

5.63

-7.79%

N/A

3/9/09

USO 27.65

26.10

5.6%

3/3/09

GERN 7.94

GQDEU 0.44 #3

MAY/7.5

6.94

7.1%

N/A

That’s it for today. The rest of this week will be spent cruising the Call Writer lists and monitoring the market for a hint of which direction it might head. Earnings will be hot and heavy the next few weeks, so be careful if you are entering any trades at this time.

Speaking of earnings, Saturday I walked by an Apple store – it was packed with people and it sounded like there was a party in there. Their earnings are Wednesday and the stock has enjoyed a very nice bull run. I wonder what will happen?

– Jeff

“I’m a great believer in luck, and I find the harder I work the more I have of it.” Thomas Jefferson (1743 – 1826)

April 18, 2009

Expiration Week and IV

I usually don’t consider rolling short calls up/out until the last few days before expiration. Thursday I was analyzing my options when it struck me that some of the rolls to the next expiration month would result in very small net credit or even a net debit! I have never experience this before – after all time value should count for something. Then I noticed something rather disturbing: the Implied Volatility (IV) for the options of the 3 positions that I wanted to roll was extraordinarily high!

In particular, let’s discuss EXM – again!

I am pretty far underwater on this stock – my cost basis is much higher than the strike price of my short Call. That being the case, I wanted to roll my APR 5.00 to the MAY 5.00. Normally this results in a net credit, but not in this case. It actually would have cost me money to do this roll out. Then I noticed the IV of the APR 5.00 was over 350% and the MAY 5.00 was around 125%. The IV of the Puts was relatively normal in comparison.

Now IV does play a part in the Black-Sholes formula for option pricing (I don’t claim to understand the formula) but how much? Apparently quite a bit! This volatility means something!

So, what should I do? The stock has had a nice run up since its low of 3.00 on March 3rd and closed Wednesday at 6.78. High IV means that the market is anticipating an event for EXM and it could be soon. I didn’t want to roll any further out than the next month – it’s just too risky.

Now we are all very small players, the big guys control all the cards. Somebody knows something. What I read into the IV on the Calls was that EXM may make a significant move in a bullish direction very soon. I checked everywhere I could think of for any news that might give me a hint, but there just wasn’t anything out there. However, I was backed into a corner and didn’t want to get called out on the rest of my positions in EXM, so I made a decision – I bought back all those calls Thursday afternoon for 1.95!

This cost me a chunk of money (one reason why I keep at least 10% of my account in cash) but now I don’t have to worry about early assignments. As of Friday, the stock is at 7.54, so I already made back 0.76 of the 1.95 I paid for those Calls. What I will do is watch for the right time to either sell the stock outright if it rises above my Cost Basis or write another set of Calls against it if it gets weak and goes flat or pulls back again.

My lesson learned is this – for positions that are deep ITM, I will not longer wait until the last few days prior to expiration to roll up/out positions that I either want to keep or are too far underwater and ITM. Of course the best position to be in is to be profitable and ITM and have your shares called away.

Monday night I will post my results for APR expiration.

– Jeff

“The wise are instructed by reason; ordinary minds by experience; the stupid, by necessity; and brutes by instinct.” Cicero (106 BC – 43 BC)

April 17, 2009

You’ve Been Assigned!

These are words that should be music to a Covered Call writer, but I had a situation this week where it was more like a very sour note – or chalk on the old chalkboard. Let me tell you about it.

Back in March I wrote a post titled “Confession – EXM“. I won’t recap that here except to say that I am seriously underwater on that stock. This month I had written APR 5.00 Calls against it even though my cost basis was over $10.00 on average. I also do not include it in any of my normal posts or open positions because it is not representative of the Covered Call method I use in my Trading Plan – sort of left over from a previous life. The problem is it is still part of my account and any activity related to it will affect my earnings.

Much to my dismay, EXM has been steadily increasing over the last few weeks and broke above 5.00 on 4/2. Now I have ‘heard’ that you are usually not called early unless there is an ex-dividend date coming up, or the Wall Street insiders know something. Since EXM suspended their dividend in January (it was a big reason for buying so much of this stock last year), I suspect (hope) that something good is going to happen.

On Monday, 4/13, I had a portion of my EXM Covered Calls assigned while the stock was priced around 6.80. This was a bit of a surprise for me and as a result I took a rather significant loss – to be posted for this month. I immediately began to fret over my remaining stash. Because of Implied Volatility on the options, rolling out to an MAY 5.00 would have actually resulted in a net debit (I will post more detail on IV as it relates to options this weekend). What to do? I considered all options and decided that I would buy back the rest of the short APR 5’s based on the bullish indications I was seeing in the options market (this, of course, is another hit to my accounts). That is all that I have to back up this decision, as there is no news (public, anyway) that indicates anything special is in the works for EXM.

As I write this post, EXM is up 4% for the day, and I hope it just keep going. I need it to pass 10.33 in order to start making up for the hit I took this month. It may take a while, but I need to be patient on this one. I took a beating and it will take time to heal.

I will post the results of April expiration on Monday – that is when I officially know exactly what happened with my positions.

– Jeff

“Mistakes are the portals of discovery.” James Joyce (1882 – 1941)

April 14, 2009

Countdown and Ramblings…

Four days to April expiration, some might say there are three days. I always get confused when counting days! Does today count as one? Do we count Friday, since that is the expiration date? I always liked the way that I learned it in the Army – 3 days and a wake up!

At this time I am not fretting over any of my positions. For the most part they are in pretty good shape. There are a few that I am underwater on that are ITM, but I will just roll them on Thursday or Friday. The rest will expire either ITM or OTM – duh!

If you are anxious to jump into new Covered Calls next week, remember to keep in mind that this is the beginning of earnings season. Personally, I will probably not open any new buy-writes next week – not only because of earnings, but also (as mentioned previously) I want to take maximum advantage of time decay. I say let the buyer pay for it!

I have been a bit frustrated lately with the limitations that WordPress.com (the free hosted version) puts on their users. I have been seriously considering hosting it myself, which would give me infinite possibilities for features. The only problem is, once I do that I will have to manage it myself. You should know that I am no web guru (I don’t know a cascading style sheet form a cascading waterfall) and my fear is that I will hose it up and crash the entire blog. Ultimately I will do it, maybe this weekend. I wanted to start adding videos and plug-ins that will, for instance, give current prices on positions. That would be cool, huh?

I recently acquired a copy of John Brasher’s The Ultimate Covered Call Book. Wow, is there a lot of good stuff in this book! Nowhere, not in any of the 20 or so books I have read on options, have I seen detailed information like this. I have been struggling with the Greeks for quite a while now, but he puts it into a form that I can understand and relates them to how they impact Covered Call writing. Repair Strategies – no one ever talks about this but he does; covering several strategies for various scenarios. He even talks about impacts on taxes – 7 pages worth! When I get done with it I will post a much more detailed review on this blog. You can find more information at CallWriter.

So, until Thursday, I will be in a watch-and-see mode. Then it’s planning for any rolls I may need to do either Thursday & Friday.

– Jeff

“Computers make it easier to do a lot of things, but most of the things they make it easier to do don’t need to be done.” Andy Rooney (1919 – )

April 10, 2009

The Case for Current Month Calls

0409_greedisgood

The famous Mr. Gekko from the Movie “Wall Street” put it very bluntly: “Greed, for lack of a better term, is good”.

Is it?

You might want to read an article by Michael Lewis posted on this blog. Mr. Lewis is the author of Liar’s Poker published in 1989 that chronicles the greed and corruption on Wall Street and predicts its eventual collapse. Coincidentally, the movie Wall Street was release two years earlier – in 1987.

Where is all this leading and what does it have to do with Covered Calls?

When I first started writing Covered Calls, I would sell Calls several months out – as many as 6 in some cases. Why? I was attracted to the huge premium – greed. Look at the example below:

0409-caseforcurrentmonth_chain

You can see that the further out the expiration date is, the higher the premium. Seeing dollar signs, huh?

But wait! Take a closer look! Notice the monthly premium actually drops off the further out you go. Prove this by dividing the Bid price of the Call option by the number of days to expiration, as illustrated in the table below (then multiply by 100 for the total Premium/Day for each contract).

0409-caseforcurrentmonth_calcxls

Granted these numbers may be a bit skewed because April expiration is only 8 days away, but it’s quite possible that it makes for an even more powerful argument – since this example is OTM and all we are looking at is Time Value. So the April Call premium is falling at a much higher rate than the other months, as expressed as the theta in the table below.

0409-caseforcurrentmonth_analyticsxls

(The option’s theta is a measurement of the option’s time decay. The theta measures the rate at which options lose their value, specifically time value, as the expiration date draws nearer. Generally expressed as a negative number, the theta of an option reflects the amount by which the option’s value will decrease every day.)

Now I am not a mathematical wiz nor do I understand completely what I am seeing here, but the numbers speak for themselves. (I had them verified by an option professional.)

In conclusion this appears to support the strategy of only (whenever possible) writing Calls, initiating Buy-Writes and even writing Cash Secured Puts for the current month only.

I rest my case, your Honor.

Today is a Market Holiday. Enjoy your long Holiday weekend.

Thank you for visiting my blog. Please feel free to comment.

– Jeff

“We make a living by what we get; we make a life by what we give.” Sir Winston Churchill (1874 – 1965)

April 8, 2009

9 Days to April Expiration

After 4 up weeks in a row, it’s no surprise that the markets have pulled back. As noted in past posts, I was focusing on Covered Calls I opened in April that had good downside protection. With 9 days to go, let’s see how they are doing.

PRU – Opened on 3/31 with an APR 15 Call and 26.19% downside protection. As of close yesterday (22.10) it is still very much ITM.

JAVA – Opened 4/2 with an APR 7 and 19.08% downside protection. As of close yesterday (6.28) it’s OTM. The deal with IBM fell through and the stock got hit hard. Its possible JAVA management may get another offer or make an announcement in the next week or so. I just need the stock to get to 7.00 to make out. I probably will not take a loss on this – I believe there will be good news coming. FYI – my Cost Basis is 6.57 on this stock.

LNC – Opened on 4/6 with an APR 5 and 27.25% downside protection. Closed yesterday at 6.89 and is still ITM.

If you look at the charts for these plays (with the exception of JAVA) you will see that they are holding their own relative to the market trend this week. We can only hope this continues for 9 more days.

– Jeff

“Courage and perseverance have a magical talisman, before which difficulties disappear and obstacles vanish into air.” John Quincy Adams (1767 – 1848)

April 6, 2009

New Position – Lincoln National Corp (LNC)

Well the market opened slightly down and continued in that direction this morning. This type of action is attractive to me since it means I can get stock cheaper with a lower strike, giving me a better chance that they will finish ITM come the 17th.

Again, I am looking for good downside protection, so I focused on CallWriter’s ITM and S&P 500 lists this morning. I had been seeing LNC on several lists last week, but I didn’t think it was the right time. But, today I noticed that the price is holding at support, around 6.40 and I had owned a Covered Call on this back in March that worked out well. Plus the APR 5 had an IV of 230%!

The only hesitation was the though in the back of my mind that I was being seduced by this stock because I had done well previously with it. I quickly dismissed that be re-evaluating my entry criteria and decided to pull the trigger.

That’s it for April unless one of my other April CC’s shows me good return on an early close, like PRU or USO. They are both getting close to the early close return. Stay tuned. If I should close those early, I will use those proceeds for more APR CC’s.

By the way, I updated the In Play page – I hope it’s easier to understand. The way I had it before was an administrative nightmare!

Date

BTO Stock & Price

STO Option & Price

Option Exp/Strike

Cost Basis

ITM Return

Downside Protection

4/6/09

LNC 6.49

LNCDA 1.80

APR/5

4.70

6.6%

27.25%

– Jeff

“I have hardly ever known a mathematician who was capable of reasoning.” Plato (427 BC – 347 BC)

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